The Nuclear Option

The UK Government position

The Government has expressed its support for nuclear power as a significant part of the UK’s low carbon energy mix.  Building a new nuclear fleet (so called “new nuclear”) is a cornerstone of the UK Government’s plans for meeting emissions targets, and subsequently presents a substantial opportunity for UK industry.

The Government recently published its National Policy Statements (NPS) designed to provide clear guidance to the newly formed Independent Planning Commission (IPC) on the Government’s priorities for major infrastructure projects.  The Nuclear NPS plays a critical part. The premise is that policy is separated from decision making, streamlining planning approval by taking issues of "need" and site location out of the IPC's remit.  This paves the way for consents on the first new build in time for the first wave of power station construction to commence in early 2011. 

So, is new nuclear on track?  And, can supply chains for new infrastructure costing £ billions be ready and, what are the prospects for UK suppliers to take full advantage?

New nuclear is crucial.  The UK needs 30 per cent of electricity generation from renewable sources by 2020. With retirement of the ageing existing coal and nuclear fleet, there is a need for some 25 GW of new capacity and, according to the NPS "...a significant proportion.." of this will be filled by nuclear.

The UK nuclear sector is in many ways in an enviable position:  The NPS give unambiguous signals to market participants that Government is serious about nuclear, planning obstacles have started to be removed, generic reactor designs are close to being licensed by the nuclear regulator, and public opinion is solidly behind nuclear power.  There are however uncertainties and obstacles that still need to be removed. 

Paul Spence, Director of Strategy and Regulation at EDF Energy called for the carbon market to be reformed to provide the necessary price signals to nuclear investment.  "Thermal generators need to pay for the cost of the waste they produce (carbon) in the same way that the nuclear industry needs to".  Spence's call for a floor price for carbon to be introduced to the EU ETS system is a popular view, but interestingly he advocates a unilateral UK solution, not reform of the EU ETS itself.  The effect of unilateral measures on the competitive position of UK industry would need to be carefully looked at and could cause more harm than good.  Charles Hendry, Shadow Secretary of State for Energy, promised details "within weeks" of how an incoming Conservative government would "internalise" societal costs of carbon.  The nuclear industry would welcome clarity on this issue:  "We've never asked for a subsidy" insisted Mr Spence, "we just require a level playing field with other renewables".

The impact on the UK manufacturing industry

The extent to which UK manufacturers will benefit from new nuclear remains to be seen.  Graham Honeyman, Chief Executive of Sheffield Forgemasters pointed to major new investment necessary to compete with Japanese and French large forging capability.  Mr Honeyman is bullish about his company's ability to compete and others estimate that 70 percent of new nuclear reactors can be supplied from the UK, however UK businesses will need to recognise the opportunity and make investments in skills and plant.  UK Government has to have a role in using consent for new build to secure UK supply chain opportunities.  New operating consortia also have a role in setting out clearly their intended procurement policies and should promote engagement with Tier 2, 3 and 4 UK suppliers to assist readiness.  What would certainly threaten the dividend from new nuclear is if foreign consortia favoured established supply chain participants.  This would impair the UK's ability to rebuild its nuclear industry again, and UK manufacturing would be excluded from the huge global growth of nuclear, particularly in developing countries.

It would seem that "The Nuclear Option" having been selected is moving forward to plan.  Issues of financing the massive costs and protecting the taxpayer from waste disposal and decommissioning risk remain, however none of this is insurmountable.  UK industry should look forward to the next 10 years with cautious optimism.

BDO provide audit, tax and corporate finance services to the energy sector and understand the business opportunities and challenges created by the Government’s response to climate change.

For more information please contact Ian Plunkett, Energy Partner at BDO.